Taxing Carbon: Are the Benefits Worth the Costs? A 2010 Update

by Jeffry Pollock, J.Pollock Inc.

Since publishing our white paper “Taxing Carbon: Are The Benefits Worth The Costs?” and our analysis of the Waxman-Markey bill, which demonstrated the possibility that proposals to tax carbon could bankrupt us all and urged a more vigorous debate, the Senate passed S.1733, known as the Clean Energy Jobs and American Power Act, or the Kerry-Boxer Act.

What follows is our analysis of Kerry-Boxer using a methodology similar to that employed in the white paper and Waxman-Markey analysis. (Prior estimates were based on the Obama administration’s projected climate revenues and J.Pollock’s analysis of Waxman-Markey. See “Taxing Carbon: Are The Benefits Worth The Costs?” and “Update on Taxing Carbon” at http://jpollockinc.com.)

The major difference between Kerry-Boxer and Waxman-Markey is the allocation of free carbon allowances over time.

Kerry-Boxer promotes more ambitious reduction targets (e.g., 20 percent reduction of 2005 emissions levels by 2020 and 83 percent reduction of 2005 emissions levels by 2050).

This is a major driver for the higher cost of Kerry-Boxer. As with Waxman-Markey, the number of free allowances, according to the “Kerry-Boxer Climate Bill Allowance Allocation Breakdown” on http://thebreak through.org, would gradually be phased out from 70 percent in 2012 to only 20 percent by 2030.

This will allow development of cost-effective greenhouse gas (GHG)-mitigating technologies, thereby lessening the impact on affected industries, including electric utilities.

Assuming the same allowance prices as in our Waxman-Markey analysis, Kerry-Boxer would increase the costs to the electric sector by more than $100 billion from 2012 through 2023; $336 billion to $440 billion.

The electricity sector emits about 40 percent of the total GHG emissions, according to Energy Information Administration data within the report “An Updated Annual Energy Outlook 2009 Reference Case Reflecting Provisions of the American Recovery and Reinvestment Act and Recent Changes in the Economic Outlook.”

The overall cost impact could range from $735 billion to $1.4 trillion from 2012 to 2030.

J.Pollock estimates that Kerry-Boxer could cost the electric sector more than $7 trillion from 2012 to 2050.

The midpoint of the projected costs are shown in Figure 1.

Using the Kerry-Boxer impacts quantified above, J.Pollock has estimated the following distribution of carbon taxes by census region (see Figures 2 and 3).

Those regions with the most amounts of coal-fired generation–Central and Atlantic–would be most impacted by carbon legislation.

Translating the projected regional carbon taxes into consumer impacts, Kerry-Boxer will result in significantly higher electricity costs by 2023.

As Figure 3 indicates, the most dramatic increase in electricity costs will occur after 2023.

These impacts are on average 42 percent higher in 2016 and 20 percent higher in 2023 than under Waxman-Markey.

The estimates reflect only the cost impact on the electric sector that will be passed through to all consumers.

All pending carbon legislation would impose separate emission reduction goals on other energy-producing (e.g., natural gas utilities, oil and gas refineries) and energy-consuming (e.g., metals and metal products, pulp and paper, and chemicals) sectors.

Thus, in addition to the direct cost increases that will be reflected in electricity bills, consumers also will experience higher costs for natural gas, transportation and an array of manufactured goods.

Background Notes

J.Pollock Inc. prepared for public distribution an in-depth white paper, “Taxing Carbon: Are the Benefits Worth the Costs?” in April 2009.

The initial report projected the impact of possible carbon legislation on consumer electricity costs by census region beginning as early as 2012.

While the higher costs would be significant, the benefits, from the research, are appallingly minimal.

J.Pollock suggested that every citizen ask two questions:

What are the actual costs of taxing carbon, not just to me individually, but to our economy?

What is the likelihood that the anticipated benefits of carbon taxes will actually materialize; that is, will they avert the predicted perils of global warming, resulting in a stronger, more secure and vibrant economy?

Carbon tax advocates fail to provide answers to these two important questions.

Since the House passed climate change legislation (Waxman-Markey) and the debate continued, J.Pollock provided an update report in September 2009 to further elucidate the issues.

That update analyzed the impact of Waxman-Markey and suggested that electricity costs will surge dramatically after 2023, thereby shifting the burden to the next generation of consumers and business owners.

 Author

Jeffry Pollock is president of J.Pollock Inc. He has a bachelor’s degree in electrical engineering and an MBA from Washington University. Reach him at jcp@jpollockinc.com.

 

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Taxing Carbon: Are Benefits Worth the Costs?

by Jeff Pollock, J.Pollock Inc.

The House of Representatives passed H.R. 2454, known as the American Clean Energy and Security Act, or Waxman-Markey.

Beginning in 2012, Waxman-Markey stipulates that 70.4 percent of the allowances will be allocated freely, while the remainder will be reserved for auction. The number freely distributed will increase to 82.5 percent by 2019 and then decline steadily thereafter before stabilizing at 30 percent in 2031 and remaining at that level until 2050.

Unlike prior cap-and-trade legislation, Waxman-Markey introduces and gradually expands the auction market for emission allowances, thereby distributing the cost burden over time. As shown below, however, such action merely has the effect of shifting, not eliminating, the bulk of the costs to the future.

The annual costs on the electricity sector would climb sharply after 2023 until 2030, when $467 billion of the more than $740 billion total will be imposed. That alone represents nearly 63 percent of the total cost burden over a seven-year period. Thus, from 2012 to 2030, the costs borne by the electricity sector are projected to surpass $740 billion, according to Energy Information Administration data in “An Updated Annual Energy Outlook 2009 Reference Case Reflecting Provisions of the American Recovery and Reinvestment Act and Recent Changes in the Economic Outlook.” Moreover, the total costs imposed on the electricity sector over the life of the legislation are projected to reach nearly $5.4 trillion by 2050.

These figures represent midpoint estimates of the potential costs to the electricity sector. J.Pollock estimates that these costs could range from $514 billion to $970 billion from 2012 to 2030, and from $3.7 trillion to $7 trillion from 2012 to 2050. These lower- and upper-bound estimates are based on data obtained from the Environmental Protection Agency (EPA) and reflect plausible and likely assumptions about economywide impacts and the response of domestic and international parties, according to the EPA’s “Analysis of H.R. 2454 in the 111th Congress, the American Clean Energy and Security Act of 2009.”

As with our previous analysis, J.Pollock has estimated the following distribution of carbon taxes by census region. Likewise, the census regions with the least amount of coal-fired generation (New England and Pacific) would be the least affected.

Translating the projected regional carbon taxes into consumer impacts, J.Pollock estimates that by 2023, every consumer will be paying significantly higher electricity costs.

As Figure 3 indicates, the most dramatic surge in electricity costs will occur after 2023, when the auction market all but supplants the free allocation of allowances. Thus, the burden of impacts is not diluted at all; rather, it simply shifts to the next generation of consumers and business owners.

Author

Jeffry Pollock is president of J.Pollock Inc. He has been an energy advisor since 1975. He has a bachelor’s degree in electrical engineering and a master’s degree in business administration from Washington University. Reach him at jcp@jpollockinc.com.